Submission to the Australian Energy Regulator by Mr. John Herbst

Submission to the Australian Energy Regulator by Mr. John Herbst.

30/1/2015

An Independent Review of SA Power Networks Initial 2015/2020 Regulatory Proposal to the AER

with Comments on Pricing Principles and Efficiency

I thank the Regulator for the opportunity to have a transparent discussion about SA Power Networks 2015-2020 Regulatory Proposal (“The Proposal”) and the many supporting documents it has submitted in obfuscation of its corporate goals. This transparent process is a necessary step in SA Power Networks’ innovative customer engagement initiative. Customers should know they are being treated fairly when contacting their network with an ‘obvious policy complaint’. Without a transparent process, the network’s response “That policy was already approved by the Regulator through a transparent process, so we can’t do anything about it now.” would be a lie. Honesty is important to customers when engaging their networks, thus the necessity of a fair process now.

Much of this response is not aimed at The Regulator. It is meant to persuade the public first and foremost, similar to the apparent purpose of The Proposal. I appreciate that The Regulator should not have to wade through noise in order to find the information it needs in order to perform its duty and make efficient decisions. To that end, I have boldfaced key comments for the Regulator. I hope this serves to reduce transaction costs of Regulation, and points out the problem with reviewing of a document which is not written clearly for the Regulator. It appears that The Proposal tends to stress the least important elements for the regulator, creating unnecessary confusion and potential bias.

I ask the regulator to reject The Proposal as it is in violation of the National Electricity Objective, and the issues are pervasive to the point that correction by amendment would not be reasonable.

Size of proposal. If the AER approves this proposal, what is signalled to the other networks? Could this trigger a ‘regulatory nightmare’ where the other networks, retailers and transmission services attempt the same end-around of The Rules? Is this an efficient way to provide the AER with unbiased information? What happens when the Regulator misses something important? Can it correct the error without whining from the perceived loser networks? One can see the complaints beginning to appear, such as in ACTewAGL’s letter to the Regulator dated 20/1/2015 in which it notes that current benchmarks have been set unfairly since discovery that SA Power Networks has been gaming the numbers. The cheating that has been allowed to occur for years has now begun to manifest in the Benchmarks themselves! On the surface, it appears ACTewAGL has a valid complaint, as they are held to an impossible standard due to corruption by peers. However, it is seemingly impossible that this corruption was not known by ACTewAGL earlier.

SA Power Networks needs to remember that a Regulatory Proposal is a legal document. It is not a marketing tool. The Regulator does not have time or resources to study proposals of this size, especially when these documents have repeatedly been used an excuse to prevent customers from being heard later, once effects of poor Regulations begin being felt.

‘Transaction Costs for Customers’: Total investment in the transaction by the Customer, minus the net payment or value realized by the seller. SA Power Networks is required to take into account transaction costs for customers when making customer policy and price decisions. SA Power Networks acknowledges that transaction costs can include indirect investment and non-financial costs such as ‘learning and understanding’.

Example 1: Goods and Services Tax. (Variable, quantifiable, equitable)

GST is an added 10% cost which is quantifiable, simple, and applied equitably across transactions. GST is variable because it grows proportionally to Price.

Example 2: Handling and Freight charges. (Fixed or variable, quantifiable, equitable)

Delivery services may offer shipping for a fixed charge regardless of quantity, variable prices according to quantity or some combination. Some offer discount Flat-rate or even Free Shipping, which would require a cross-subsidy from sales revenue to pay for. Bulk-buy discounts often reflect the returns to scale available, and may result in stimulating efficient use of transportation. On the other hand, high fixed freight charges result in low incentive to make ‘small orders’, as the transaction costs per unit can be outrageous when ordering a very small quantity. In cases where The Customer does not require a large quantity but is faced with high, fixed shipping charges, The Customer will seek alternative sellers or substitutes. If no suitable alternative exists, this leads to market failure. More on this follows Example 4.

Example 3: Wait-times for Solar services. (Fixed, Not Quantifiable, equitable within reason)

If wait-times and prices for Solar-related Alternative Control Services are kept reasonable, then one would have no basis to claim unfair treatment of Solar customers with respect to these charges. By ‘reasonable’, I mean either negligible, similar to, or better than service times provided to others, compared on an “apples-to-apples” basis. Wait times cost more than just money for customers, thus the total cost is not observable by the network except through estimation.

Example 4: Understanding a complex Contract, Bill, Offer, Proposal, etc. (Inequitable, non-quantifiable. Damages small customers, SEG Owners.)

(Fake) Executive Summary of Example 4:

As an Executive, you value your time highly. You need the facts, now. You deserve to be treated fairly, even when you choose not to read the Fine Print. Your choice to ignore prices and price signals does not free the network from its obligation to charge you fairly. Go be awesome and know we’ve got your back. Just please take a moment to appreciate that the guys who signed up to analyse SA Power Networks regulatory proposal have 40,000 pages to go through. If you are the guy assigned to read and analyse every word of my submission, I apologize for what you are about to read.

Executive Decision-making Activity: Decide now whether it is worth your effort to try to understand the block of confusing economics I’ve written on the next page. It simply illustrates the point that “Study Time” can matter, especially when a Summary is not a valid representation of the full document being summarized.

HINT: It’s safe to skip, except that you never know what you might miss. Only appointed representatives from interested parties need read every word. This is just an attempt to conglomerate many observations into one, pointing out the problems with choosing one pricing principle and calling it ‘essential’ while ignoring the others. My attempt to reduce the reader’s Transaction Costs J by writing as efficiently as possible results in no benefit to the customer.

PARAGRAPH 1 of 1: I include this example because Network and Retail charges will be very confusing if SA Power Network’s innovative, cost-reflective price-stable, continuous-price-signalling, equitable, validly-tested and proven-without-bias-to-be-superior-to-all-other-available-options- ‘The Tariff’ (Monthly Demand for all… details coming in May) is approved. Even full compliance and clarity from the industry is not sufficient to make price-signal feedback strong enough to lead to efficient behaviour. Any time a customer is not fully aware of the price-signal offered, the value of the signal is lost. Therefore, for example, if a customer decides not to bother trying to understand his bill, he is trading a fixed cost for an unknown one. To illustrate the compounding problems that can occur, note that the longer I make this paragraph, the higher the transaction costs go for all readers who choose to attempt it. The length of the paragraph may be enough to put off many who might have attempted to understand something simpler. If this were part of a network proposal, I could justify this paragraph’s length as ‘necessary costs to educate readers about important pricing principles and protections given to them under the NER’. As evidence I can take samples of readers selected randomly, many which will contain no one exhibiting harm from having not read and understood this fully. Extrapolation of results to claim they apply to larger populations is invalid when the sample is biased, or the underlying distribution of costs is highly skewed (as in this case). Yet I see that very logic at the core of multiple statistical arguments for the validity of Demand as a necessary and unique ‘cost-reflective’ tariff. The cost-reflective problem comes later. Back to transaction costs, I’ve reduced my example to 1 page, just 1 paragraph, thus have very efficiently conveyed these messages to my readers, whose feedback I value. Be thankful I took the time to revise this paragraph a bit rather than just haphazardly updating it without regard to grammar, spelling and punctuation, which was proposed, though it was found inefficient after a detailed study. Again, this paragraph is meant to point out the real problem with not only retail bills but also all kinds of proposals, reports, and arguments currently being made to the AER by over 50% of networks. In response to the AER’s question to consumers about customer engagement, I would say that it is Broadly Agreed by a sample of knowledgeable insiders, whose results were conglomerated by me with no regard to statistical validity, that SA Power Networks has neither made an effort to engage customers nor reported customers’ true concerns in an honest and clear manner. I am especially outraged at SA Power Networks representation of the serious problem faced by residents of Kangaroo Island, who are begging for some security and sovereignty in their electricity supply. A 2nd transmission line with a back-up of ‘ferry diesel’ seems like a primitive solution, not at all what the residents asked for. Perhaps there are some who feel they are put out by my innovation and efficiency in writing this, but my reply to those ‘perceived or actual losers’ in this transition to real efficiency is to suck it up and deal. If the networks just would increase the validity-factor of their maths, stats and logic, we could all be done with this absurdity. In addition to the numerous clauses I hope the regulator will address, I ask the AER to consider exercising its option to REJECT SA Power Networks’ entire Regulatory Proposal, due to its deficiencies in providing evidence that its planned Tariff design is aligned with the National Electricity Objective. Public feedback cannot be provided efficiently at this time. A prudent and efficient network should recognize that ‘The Tariff’ may not pass all of the regulatory requirements that the Network believes that it should, and that even agreement from the industry does not prevent future evidence from appearing and knocking down the house of cards. The Proposal is a document which will have the force of law, and has enormous effect on South Australians, with rippling effects outward to the world. It therefore should be written clearly in logical order, not as a marketing document. Clear and unbiased justification for controversial policy choices is the only way to engage customers in efficient discussion of issues. Now, I’m not saying it’s not reasonable to subject a few customers to higher transaction costs because they are situated differently than the representative customer, I’m just saying if I tried to claim it doesn’t matter how long I make this paragraph, I believe that anyone who has just been forced to carefully follow every word of this precisely written, simple, and efficient paragraph may find themselves a little annoyed at being put through this wasted effort, and wish I had stated my points more clearly. I could have made this paragraph much longer (say, 40,000 pages) and far less interesting, but decided not to waste the time of those who invest in reading it. As it clearly costs more to read something boring than something interesting, my strategy has effectively minimized transaction costs to readers. By rounding to the nearest integer the number of pages in this example (Net Executive overhead) you see that the resulting number of pages is clearly 1. Sorry again.